Ask The Underwriter
Monday, 30 June 2008 16:00
Q How do repairs effect property final values and can repairs be completed after the reverse mortgage loan closes?


A Many loan originators and borrowers continue to be frustrated by the effect of declining market values on their principal limit calculation. The underwriting responsibility and task to determine the final property value, factoring into the equation current issues of loan “saleability” and loan “insurability”, must consider the overall condition of the property with respect to repairs as well.


Determining the property applicability to HUD and/or Investor minimum property standards requires the collaborative efforts of both the appraiser and the underwriter. While “conservative” underwriting is a concern for many originators, the preparation and analysis guidelines for determining needed or required repairs have not changed due to the declining values in the marketplace.


Providing the borrower with the best upfront pre-qualification information based upon estimated property value in a declining market adds additional research and skills to current origination activities. 


A “walk thru” or at home origination adds considerable value to the loan originator’s assistance to determine an initial property value. In the absence of this access, a thorough discussion of property condition should be undertaken in the initial discussions with the borrower before coming to a preliminary property value estimate to be used with a loan calculator. 


The following comments and information are a summary of different underwriting perspectives and are offered for consideration. Some of the items indicated may differ from lender to lender, however, in general, a working knowledge of repairs and appraisal repair comments will provide an excellent foundation to conduct property condition discussions with the borrower.

Required repairs are usually only those necessary to protect the health and safety of the occupants and protect the security of the property.


Generally, examples of repairs (others may be added or removed from time to time) that are typically required:
• Inadequate exits from bedrooms to the exterior of home (fire safety issues)
• Leaking or worn out roofs (typically should 3 or more layers of shingles exist on a leaking or worn out roof, all existing shingles must be removed before re-roofing)
• Evidence of structural problems (such as foundation damage caused by excessive settlement). “Jacking” and similar repair techniques present additional issues in some cases.
• Defective paint surfaces in homes constructed pre-1978.
â—¦ If the damage to the paint is minor, repairs are not required unless there is a child under the age of seven years residing in the property.
â—¦ To determine whether there is a child living in the home, lenders may require the use the application form #433-3w, Lead Based Paint Certification.
• Defective exterior paint surfaces in any home, regardless of the age of the home, where the finish is otherwise unprotected. This is somewhat common to older frame homes and generally results in an appraiser notation of “scrape and paint”.
Generally, examples of repairs that may be waived or are no longer required include (others may be added or removed from time to time):
• Missing handrails
• Cracked or damaged exit doors that are otherwise operable
• Cracked window glass
• Defective paint surfaces in homes constructed post 1978 unless the surface is completely unprotected (remember the unprotected paint issue raised above)
• Minor plumbing leaks (such as leaky faucets, not inoperable showers, tubs, toilets, sinks, sewers or drains)
• Defective floor finish or covering (worn through the finish, badly soiled carpeting – ripped carpeting which could cause harm or danger is not included)
• Evidence of previous (non-active) termite damage where there is no evidence of unrepaired structural damage
• Rotten or worn out counter tops – the kitchen must be functional
• Damaged plaster, sheetrock or other wall and ceiling materials in homes constructed post 1978
• Poor workmanship
• Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting)
• Crawl space filled with debris and trash – depending upon the type of trash and debris which cause a health hazard
• Lack of an all weather driveway surface
• Pet issues unless they present a health and safety issue or the property and structure may be classified as animal shelter not zoned or licensed for
It is key to remember that the underwriter is responsible for the final determination of value and the safety and soundness of the property. However, the use of an appraiser familiar with current guidelines and experience in converting overall property condition to a reasonable value greatly assists in this process.
 The term “cosmetic” repairs is generally misunderstood by the borrower and the loan originator. Many appraisers include interior photos of the property with little or no comment, leaving the final assessment to the underwriter. Significant cosmetic repairs or deferred maintenance may be a contributing factor to the final value determination by the underwriter and should not be considered lightly. 


When repairs are needed, the Appraisal is issued one of three ways:


Subject to Completion per Plans and Specs 
Proposed construction where construction has not started (not acceptable for reverse mortgage lending)
Under construction but less than 90% complete (not acceptable for reverse mortgage lending)


Subject to Repairs or Alterations
Repair or alteration conditions noted by appraiser 
Under construction more than 90% complete with only minor finish work remaining (i.e. floor coverings, appliances, fixtures, landscaping, etc)


Subject to required inspection and/or repairs
Required inspection noted by the appraiser


You must address all “subject to” conditions and required repairs before approval, either by planning to establish a repair escrow, submitting required inspection or test reports indicating a satisfactory status, or by showing that repairs are complete and have been re-inspected. 


To escrow for repairs, a contractor’s bid or estimate of cost to cure determined by the appraiser must be reviewed by the underwriter.


The bid or appraiser estimate is used to determine the amount of repair escrow set aside. Included in the overall calculation of the repair escrow is the collection of an administration fee noted on the HUD-1 at closing (this may be added to the loan balance). The administration fee is the greater of $50 or 1.5% of the funds calculated for repairs.


Subsequent to funding the lender servicing department will administer the repair escrow and disburse funds. Lender servicing procedures may vary so it is important to understand the entire process in order to adequately and clearly explain to the borrower the resolution process for repairs.


In some cases, a repair escrow is not permissible. This is usually due to the urgent nature of the repairs, the high cost of the repairs or conditions present that are unable to be addressed by a repair escrow. Additionally, the underwriter may determine in some situations where health and safety-related repairs are required, that the degree of hazard or impact may cause additional or unknown secondary repairs or the need to complete the repairs prior to closing is necessary to preserve the integrity of the property and immediate safety of the borrower. Examples of some of these types of repair are:
• Broken or inoperable exterior windows or doors
• Inadequate exits in case of fire, including window and door bars
• Roof leaks
• House must be jacked up to repair foundation
• Well and septic don’t meet FHA requirements
• Sparking, smoking, unconnected, frayed electrical wiring
• Evidence of sink holes or slush pits
• Easements for “high-pressure” gas or oil lines
• Evidence of soil contamination
• Property cannot be legally accessed by road or right-of-way
• Nearby hazards such as:
â—¦ Oil or gas drilling (proposed, in progress, or abandoned)
â—¦ Slush pits
â—¦ Traffic, fumes, or noise to a hazardous degree
â—¦ High-voltage (“high test”) powerlines in falling distance
â—¦ Radio towers in falling distance
â—¦ Landfills or other hazardous material


In some cases the overall cost of repairs may be the limiting factor with no one repair causing issue. A general rule for determining if the total of eligible repairs required can be accommodated by escrow is :
• If the bid is less than 15% of the maximum claim amount (MCA), then you may escrow for repairs.
â—¦ Example: MCA is $100,000, and the repair bid is $14,000 (14% of $100,000), you may escrow for repairs.
• If the bid is more than 15% of the MCA, then some repairs must be completed prior to closing. (Complete at least enough repairs to reduce the bid to less than 15% of the maximum claim amount based upon appraiser re-inspection. Then you may escrow for the rest).
â—¦ Example: MCA is $100,000, and the repair bid is $19,000 (19% of $100,000). $4,000 in repairs are completed and re-inspected. This brings the bid down to $15,000 (15% of $100,000) and you may escrow for the remaining repairs.
• HECM loans only: If required repairs are estimated to cost more than 30% of the maximum claim amount, the Valuation Branch of the local HUD office should review the property to determine if it is acceptable.


Generally, a property should not be rejected or determined ineligible by an appraiser for the amount of repairs noted. The appraiser comments and notations reviewed by the underwriter may result in a suggested course of action for the property which could result in approving the property. 


As stated previously, it is important that the appraisal report reflects the property in form and content that the underwriter can assist the borrower in meeting their needs. The final determination of property condition and the use of a repair escrow process may not be the sole solution to property issues and appraisal content failures. 


A note about our subject matter expert: Mr. Rosynek has been involved in mortgage lending for over 30 years with the last 5+ years exclusively providing reverse mortgage lending solutions. To contact Mr. Rosynek or to learn more about 1st Reverse Financial Services, please visit www.1streverse.com or call 877-574-1000.
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